U.S. Federal Reserve Meeting Minutes for September 21 (Text)

Oct. 12 (Bloomberg) -- Following are the minutes of the
Federal Reserve’s Open Market Committee meeting that concluded
on September 21.

Minutes of the Federal Open Market Committee

September 20-21, 2011

A joint meeting of the Federal Open Market Committee and the
Board of Governors of the Federal Reserve System was held in the
offices of the Board of Governors in Washington, D.C., on
Tuesday, September 20, 2011, at 10:30 a.m., and continued on
Wednesday, September 21, 2011, at 9:00 a.m.

Developments in Financial Markets and the Federal Reserve’s
Balance Sheet

The Manager of the System Open Market Account (SOMA) reported on
developments in domestic and foreign financial markets during
the period since the Federal Open Market Committee (FOMC) met on
August 9, 2011. He also reported on System open market
operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on SOMA
holdings of agency debt and agency-guaranteed mortgage-backed
securities (MBS). By unanimous vote, the Committee ratified the
Desk’s domestic transactions over the intermeeting period.

Staff Presentation on Policy Tools

The staff gave a presentation on several tools that could be
used, within the Committee’s current policy framework, to
provide additional monetary policy accommodation to support the
economic recovery. The presentation first reviewed three options
for managing the size and composition of the SOMA portfolio: a
reinvestment maturity extension program, a SOMA portfolio
maturity extension program, and a large-scale asset purchase
program. Under the first of these options, the Federal Reserve
would reinvest the principal payments it receives on its
holdings of agency securities exclusively in long-term Treasury
securities. Under the second option, the Committee would
purchase long-term Treasury securities and sell the same amount
of shorter-term Treasury securities; these transactions would
significantly increase the average maturity of the SOMA
portfolio, but the size of the Federal Reserve’s balance sheet
and the level of reserve balances would be largely unaffected in
the near term. Under the third option, the Committee would
purchase longer-term Treasury securities, increasing the size of
its balance sheet and the supply of reserve balances. The staff
also summarized a set of options for clarifying, for the public,
the Committee’s longer-run objectives under its dual mandate as
well as the Committee’s forward guidance about the likely future
stance of monetary policy. The options focused on ways to
elucidate the economic conditions that could warrant raising the
level of short-term interest rates. Finally, the staff
presentation summarized the potential implications of reducing
the interest rate that the Federal Reserve pays on reserve
balances that depository institutions hold in accounts at the
Federal Reserve Banks (the IOR rate).

Meeting participants expressed a range of views on the potential
efficacy of policy tools tied to the size and composition of the
Federal Reserve’s balance sheet. Many judged that these policies
could provide additional monetary policy accommodation by
lowering longer-term interest rates and easing financial
conditions at a time when further reductions in the federal
funds rate are infeasible. However, a number saw the potential
effects on real economic activity as limited or only transitory,
particularly in the current environment of balance sheet
deleveraging, credit constraints, and household and business
uncertainty about the economic outlook. Participants noted that
a SOMA maturity extension program would not expand the Federal
Reserve’s balance sheet or the level of reserve balances, and
that the scale of such a program was necessarily limited by the
size of the Federal Reserve’s holdings of shorter-term
securities so that it could not be repeated to provide further
stimulus. A number of participants saw large-scale asset
purchases as potentially a more potent tool that should be
retained as an option in the event that further policy action to
support a stronger economic recovery was warranted. Some judged
that large-scale asset purchases and the resulting expansion of
the Federal Reserve’s balance sheet would be more likely to
raise inflation and inflation expectations than to stimulate
economic activity and argued that such tools should be reserved
for circumstances in which the risk of deflation was elevated.
In commenting on the implications of a maturity extension
program or another large-scale asset purchase program, several
participants noted that the System should avoid holding a very
large proportion of the outstanding stock of longer-term
Treasury securities in its portfolio because the result could be
a deterioration in market functioning. A number of participants
suggested directing some purchases or reinvestments into agency
MBS; however, a couple of participants saw such actions as
unlikely to have benefits, or as a form of credit allocation.

Most participants indicated that they favored taking steps to
increase further the transparency of monetary policy, including
providing more information about the Committee’s longer-run
policy objectives and about the factors that influence the
Committee’s policy decisions. Participants generally agreed that
a clear statement of the Committee’s longer-run policy
objectives could be helpful; some noted that it would also be
useful to clarify the linkage between these longer-run
objectives and the Committee’s approach to setting the stance of
monetary policy in the short and medium run. That said, a number
of participants expressed concerns about the conceptual issues
associated with establishing and communicating explicit longer-run objectives for the unemployment rate or other measures of
labor market conditions, inasmuch as the long-run equilibrium
levels of such measures are influenced importantly by
nonmonetary factors, are subject to change over time, and are
estimated with considerable uncertainty. In contrast,
participants noted that the long-run level of inflation is
determined primarily by monetary policy. Accordingly, many felt
that if the Committee were to reach a consensus on more explicit
statements of its longer-run objectives, it would need to
provide an in-depth explanation to the public of how those
objectives were determined and how they fit into the
policymaking framework. Participants generally saw the
Committee’s post-meeting statements as not well suited to
communicate fully the Committee’s thinking about its objectives
and its policy framework, and agreed that the Committee would
need to use other means to communicate that information or to
supplement information in the statement.

Most participants also indicated that they saw advantages in
being more transparent about the conditionality in the
Committee’s forward guidance by providing more information about
the economic conditions to which the guidance refers. They
judged that such a step could make the Committee’s forward
guidance more effective and increase the likelihood that
financial markets would respond to incoming economic information
in ways that would help monetary policy achieve its goals.
However, several participants saw a risk that any explicit
statement of economic conditions specified in the Committee’s
forward guidance could be mistaken for a statement of its
longer-run objectives. Others thought this risk of
misinterpretation could be managed through careful
communications. A number of participants suggested that the
Committee’s periodic Summary of Economic Projections could be
used to provide more information about their views on the
longer-run objectives and the likely evolution of monetary
policy.

Participants discussed whether to reduce the IOR rate, weighing
potential benefits and costs. A number of participants judged
that a reduction would result in at least marginally lower money
market rates and could help stimulate bank lending. Several
noted that reducing the IOR rate could help signal the
Committee’s intention to keep the federal funds rate low. Some
participants observed that keeping the IOR rate noticeably above
the market rate on other safe, short-term instruments could be
perceived as subsidizing some banking institutions. However,
some others noted that a recent change in deposit insurance
assessments had the effect of significantly reducing the net
return that many banks receive from holding reserve balances.
Moreover, many participants voiced concerns that reducing the
IOR rate risked costly disruptions to money markets and to the
intermediation of credit, and that the magnitude of such effects
would be difficult to predict in advance. In addition, the
federal funds market could contract as a result and the
effective federal funds rate could become less reliably linked
to other short-term interest rates. Participants generally
agreed that they needed more information on the likely effects
of a reduction in the IOR rate in order to judge its usefulness
as a policy tool in the current environment.

Staff Review of the Economic Situation

The information reviewed at the September 20-21 meeting
indicated that economic activity continued to expand at a slow
pace and that labor market conditions remained weak. Consumer
price inflation appeared to have moderated since earlier in the
year, and measures of long-run inflation expectations remained
stable.

Private nonfarm employment rose only slightly in August, and job
gains were weak even after adjusting for the effects of a strike
by communications workers during the month. Meanwhile,
employment at state and local governments declined further,
reflecting their tight budget conditions. The unemployment rate
remained at 9.1 percent in August, and both long-duration
unemployment and the share of workers employed part time for
economic reasons were still elevated. Initial claims for
unemployment insurance edged up, on net, over the previous few
weeks, and many indicators of firms’ hiring plans deteriorated
somewhat in recent months.

Industrial production expanded solidly but unevenly in July and
August, and the manufacturing capacity utilization rate moved up.
Output increased markedly at both motor vehicle manufacturers
and their upstream suppliers as the supply chain disruptions
associated with the earthquake in Japan eased. In contrast, the
pace of factory production softened among industries unlikely to
have been affected by the supply disruptions. Motor vehicle
assemblies were scheduled to rise noticeably in September and
then increase further in the fourth quarter, but broader
indicators of near-term manufacturing activity, such as the
diffusion indexes of new orders from the national and regional
manufacturing surveys, remained at levels consistent with only
meager gains in output in the coming months.

Real consumer spending posted a solid gain in July, in part
reflecting a rebound in motor vehicle purchases from their low
level in the spring when the availability of some models was
limited. However, nominal retail sales, excluding purchases at
motor vehicles and parts outlets, only inched up in August, and
sales of new light motor vehicles ticked down. Real disposable
income edged lower in July, as gains in nominal income were
offset by the rise in consumer prices. Consumer sentiment
deteriorated significantly further in August and stayed downbeat
in early September.

Activity in the housing market continued to be depressed by weak
demand, uncertainty about future home prices, tight credit
conditions for mortgages and construction loans, and a
substantial inventory of foreclosed and distressed properties.
Starts and permits for new single-family homes in July and
August stayed near the very low levels seen since the middle of
last year. Sales of new and existing homes remained subdued in
recent months, and home prices edged down further.

Real business spending on equipment and software appeared to
expand further. Nominal shipments of nondefense capital goods
increased in July, and business purchases of new motor vehicles
trended higher. New orders of nondefense capital goods continued
to run ahead of shipments in July, and the expanding backlog of
unfilled orders pointed toward further gains in outlays for
business equipment in subsequent months. In contrast, survey
measures of business conditions and sentiment remained at muted
levels in August and September. Real business expenditures for
office and commercial buildings moved up in recent months, but
outlays were still at a very low level and continued to be
restrained by high vacancy rates and tight credit conditions for
construction loans. Meanwhile, spending for drilling and mining
structures increased further. Businesses seemed to be adding to
inventories at a more modest pace in July, as the restocking of
motor vehicle inventories depleted by the earlier production
disruptions was offset by slowing accumulation in other sectors.
In most industries, inventories looked to be reasonably well
aligned with sales.

Real federal government purchases appeared to increase in recent
months as defense expenditures continued to rise from unusually
low levels early in the year. At the state and local level, real
government purchases seemed set to decline further as payrolls
were reduced and construction spending decreased.

The nominal U.S. international trade deficit widened in June but
narrowed significantly in July. Exports rose briskly in July,
particularly in industrial supplies and capital goods, after
having decreased in June. Imports moved down in both months, as
declines in petroleum products--reflecting both lower prices and
decreased volumes--more than offset large gains in automotive
products following the easing of supply chain disruptions in
Japan. Trade data for July suggested that net exports continued
to boost U.S. real gross domestic product (GDP) growth in the
third quarter.

Monthly U.S. consumer price inflation picked up in July and
August after slowing in May and June, but remained a bit lower
than earlier in the year. Consumer energy prices stepped up in
July and August but only partially retraced their decline over
the previous two months, and the increases in food prices were
somewhat below the pace seen early in the year. The consumer
price index excluding food and energy rose at about the same
average monthly rate in July and August as in the second quarter.
Near-term inflation expectations from the Thomson
Reuters/University of Michigan Surveys of Consumers in August
and September stayed well below the elevated level seen in the
spring, and longer-term inflation expectations remained stable.

Available measures of labor compensation indicated that wage
increases continued to be restrained by the large margin of
slack in the labor market. Average hourly earnings for all
employees posted a small gain, on net, over July and August, and
their rate of increase from 12 months earlier remained subdued.

Foreign economic growth declined in the second quarter. Growth
slowed notably in Europe; economic activity also decelerated in
the emerging market economies. Real GDP contracted in Canada due
to a large decline in exports. Output also fell in Japan,
reflecting the dislocations caused by the March earthquake. Part
of the downshift in global economic growth appeared to have been
driven by temporary supply chain disruptions caused by Japan’s
earthquake. Although the waning of these disruptions seemed to
be supporting a rebound in foreign GDP growth in the third
quarter, recent indicators suggested only sluggish gains in
underlying economic activity. With the intensification of fiscal
and financial stress in the euro area, measures of consumer and
business confidence declined in August, and indicators of
manufacturing activity in the region deteriorated. For many
emerging market economies, the recent slowing in growth of
economic activity was most evident in exports, industrial
production, and other indicators of manufacturing activity.
Inflation abroad eased in the second quarter as the effects of
earlier increases in food and energy prices began to fade. More
recently, however, increases in domestic food prices appeared to
be pushing up consumer price inflation in some economies.

Staff Review of the Financial Situation

Financial markets were volatile over the intermeeting period as
investors responded to mostly downbeat news on economic activity
in the United States and abroad. Fluctuations in investors’
level of concern about European fiscal and financial prospects
also contributed to market volatility.

The expected path of the federal funds rate moved down
appreciably over the intermeeting period. Investors initially
focused on the firmer forward guidance in the August FOMC
statement indicating that the Committee anticipated that
economic conditions were likely to warrant exceptionally low
levels of the federal funds rate at least through mid-2013. Over
subsequent weeks, weak economic data contributed to rising
expectations of additional monetary accommodation; those
expectations and increasing concerns about the financial
situation in Europe led to an appreciable decline in
intermediate- and longer-term nominal Treasury yields. Partly in
reaction to the softer economic outlook, measures of inflation
compensation for the next 5 years as well as 5 to 10 years ahead
derived from nominal and inflation-protected Treasury securities
each fell to the low end of their ranges for this year.

Since early August, the equity prices of large U.S. financial
institutions fell and their credit default swap (CDS) spreads
widened. More-pronounced declines in equity prices and larger
increases in CDS spreads occurred for some European financial
institutions. Though many large European banks found it
increasingly difficult, in recent weeks, to get unsecured dollar
funding beyond the very short term, the conditions faced by U.S.
financial institutions in these markets were little changed. In
secured funding markets, term financing reportedly remained
readily available for both domestic and European financial
institutions through repurchase agreements backed by Treasury
and agency collateral. However, some strains emerged late in the
intermeeting period in the market for repurchase agreements
backed by lower-quality, nontraditional collateral. In response
to dollar funding pressures abroad, the Bank of England, the
European Central Bank (ECB), and the Swiss National Bank
announced that they would offer banks in their jurisdictions
dollar loans for periods of approximately three months as well
as continue to offer dollar loans for one-week periods; the Bank
of Japan added to its previously announced program of three-month and seven-day dollar loans.

Broad stock price indexes were volatile but increased, on net,
since the August FOMC meeting, following sharp declines in the
days just preceding that meeting. Gross public equity issuance
by nonfinancial firms weakened substantially in recent weeks,
and a large number of planned initial public offerings were
shelved amid the heightened market volatility.

Spreads of yields on investment- and speculative-grade corporate
bonds over those on comparable-maturity Treasury securities rose
significantly over the intermeeting period, reaching levels last
registered in late 2009, and average bid prices in the secondary
market for syndicated leveraged loans declined. Credit flows in
August offered additional evidence that debt markets had become
less hospitable to lower-rated nonfinancial firms. Bond issuance
by speculative-grade firms nearly came to a halt, and the volume
of new leveraged loans financed by institutional investors
appeared to drop sharply after having moved down in July.
However, net bond issuance by investment-grade companies
remained robust in August despite wider spreads, and
nonfinancial commercial paper outstanding increased slightly.

In the September 2011 Senior Credit Officer Opinion Survey on
Dealer Financing Terms, dealers reported only small changes in
credit terms across major classes of counterparties over the
past three months. Respondents noted that the use of financial
leverage by hedge funds decreased somewhat over the same period.
Dealers also indicated that their clients’ willingness to bear
risk generally had declined somewhat; that was particularly true
of hedge funds.

Financing conditions for commercial real estate remained weak.
Issuance of commercial mortgage-backed securities (CMBS) slowed
further in July and August, and investors appeared to demand
greater compensation for risk. Prices of most types of
commercial properties remained depressed despite a slight
decline in vacancy rates in the second quarter. Delinquency
rates on loans that back existing CMBS hovered at an elevated
level in August, but delinquency rates on commercial real estate
loans held by banks decreased in the second quarter.

Residential MBS yields and residential mortgage interest rates
declined, on net, over the intermeeting period to historically
low levels, but their spreads to yields on long-term Treasury
securities increased. However, low mortgage rates spurred little
refinancing activity, in part because of tight underwriting
standards and low levels of home equity for many households.
Residential mortgage debt contracted further in the second
quarter, and the volume of mortgage applications to purchase
homes moved down so far in the third quarter. Rates of serious
mortgage delinquency continued to moderate but remained high,
while the rate at which prime mortgages moved into delinquency
stepped up, on balance, in recent months.

Consumer credit increased at a solid pace in July, as a sizable
increase in nonrevolving credit--driven by a surge in federally
funded student loans--more than offset a decrease in revolving
credit. Issuance of consumer asset-backed securities moved down
in August, but spreads on these securities remained low.
Delinquency rates for several categories of consumer loans moved
down further in recent months, with some reaching levels not
seen since the 2008-09 recession began.

Core commercial bank loans--the sum of commercial and industrial
(C&I), real estate, and consumer loans-- expanded slightly in
July and August. C&I loans grew strongly, consumer loans showed
tepid growth, and real estate loans continued to decline. The
upturn in lending was concentrated at large domestic and foreign
institutions; at smaller banks, core loans declined in July and
August at about the same pace as in recent quarters.

M2 surged in July and August, as investors and asset managers
sought the relative safety and liquidity of bank deposits and
other assets that make up the M2 aggregate. Notably,
institutional investors, concerned about exposures of money
funds to European financial institutions, shifted from prime
money funds to bank deposits, and money fund managers
accumulated sizable bank deposits in anticipation of potentially
large redemptions by investors. In addition, retail investors
evidently placed redemptions from equity and bond mutual funds
into bank deposits and retail money market funds.

The foreign exchange value of the dollar increased over the
intermeeting period, reflecting a flight to safety that also
contributed to lower benchmark sovereign yields in Germany, the
United Kingdom, and Canada. In contrast, the yield on two-year
Greek sovereign bonds rose sharply as market participants became
increasingly concerned that Greece might default on its
sovereign debt. Equity prices in the euro area decreased over
the intermeeting period, following sharp declines in early
August. After falling steeply before the August FOMC meeting,
emerging market equity prices were little changed, on net, over
the period.

The European Central Bank continued to purchase, in the
secondary market, sovereign debt of euro-area countries. Yields
on Italian and Spanish debt, which declined following reported
ECB purchases in early August, drifted higher during the
intermeeting period. Prices of money market futures contracts
indicated that monetary policy was expected to become more
accommodative in both the euro area and the United Kingdom. The
Swiss National Bank took several steps to ease monetary policy,
including intervening in the foreign exchange market to counter
further appreciation of its currency and eventually announcing
that it is prepared to buy unlimited quantities of foreign
currency to prevent the Swiss franc from trading in the foreign
exchange market at a rate below 1.2 Swiss francs per euro.
Citing concerns over the global economic outlook, the central
bank of Brazil reduced its policy rate after having raised it
several times earlier this year. In contrast, China continued to
tighten its monetary policy, extending reserve requirements to a
wider range of bank liabilities as it attempted to rein in off-balance-sheet lending by its banks.

Staff Economic Outlook

In the economic forecast prepared for the September FOMC meeting,
the staff lowered its projection for the increase in real GDP in
the second half of 2011 and in the medium term. The incoming
data on household and business spending were about as expected,
on balance, but labor market conditions and indicators of near-term economic activity, such as consumer and business sentiment,
were weaker than anticipated. In addition, financial conditions
deteriorated since the time of the previous forecast as
investors pulled back from riskier assets. Nevertheless, the
staff continued to forecast that economic activity would
increase more rapidly in the second half of this year than over
the first half, as supply chain disruptions in the motor vehicle
sector eased. In the medium term, the staff still projected real
GDP to accelerate gradually, supported by accommodative monetary
policy, further increases in credit availability, and
improvements in consumer and business confidence from their
current low levels. The increase in real GDP was expected to be
sufficient to reduce the unemployment rate only slowly over the
projection period, and the jobless rate was anticipated to
remain elevated at the end of 2013.

The staff’s projection for inflation was little changed from its
forecast at the time of the August FOMC meeting. The upward
pressure on consumer prices from increases in import and
commodity prices earlier in the year, along with the temporary
boost to motor vehicle prices from low inventories, were
expected to recede further in the coming quarters. With stable
long-run inflation expectations and considerable slack in labor
and product markets anticipated to persist over the forecast
period, the staff continued to project that inflation would be
subdued in 2012 and 2013.

Participants’ Views on Current Conditions and the Economic
Outlook

In their discussion of the economic situation and outlook,
meeting participants agreed that the information received during
the intermeeting period indicated that economic growth remained
slow but did not suggest a contraction in activity. Temporary
factors that had contributed to slower growth during the first
half of the year had partly reversed, contributing to some
rebound in final sales and production, particularly in the
manufacturing sector where progress had been made in resolving
supply chain disruptions. But stresses in global financial
markets, sluggish growth in households’ real incomes, and
heightened uncertainty about economic prospects seemed to have
contributed to lower consumer and business sentiment and to be
weighing on economic growth. Recent indicators pointed to
continuing weakness in overall labor market conditions, and the
unemployment rate remained elevated. Inflation appeared to have
moderated since earlier in the year as prices of energy and some
commodities declined from their peaks, but inflation had not yet
come down as much as participants had expected earlier this year.
Labor costs remained subdued.

Looking ahead, participants continued to expect some pickup in
the pace of recovery over coming quarters but anticipated that
the unemployment rate would decline only gradually. They
generally judged that risks to the growth outlook, including
strains in global financial markets, were significant and tilted
to the downside; moreover, slow growth left the recovery more
vulnerable to negative shocks. With longer-term inflation
expectations remaining stable and the effects of past increases
in energy and commodity prices continuing to dissipate, most
participants saw both core and headline inflation as likely to
settle, over coming quarters, at or below the levels they see as
most consistent with their dual mandate.

Participants continued to see the outlook for growth and
inflation as more uncertain than usual. Participants noted
modest growth in consumer spending on average in recent months,
with some rebound in purchases of new motor vehicles as
manufacturers made progress in resolving supply chain
disruptions and increased the availability of popular models.
Surveys suggested that households were pessimistic about their
future incomes, and consumer confidence had dropped to
historically low levels. Low confidence, continuing efforts to
repair balance sheets, and heightened caution in the face of an
uncertain economic environment were seen as factors likely to
weigh on household spending. Several participants pointed to
depressed home prices and financial constraints, including
still-tight credit conditions for many households, as also
likely to restrain consumer spending for a time. However,
household debt-service burdens had declined, indicating that
there had been further progress in repairing household balance
sheets.

Business sentiment had worsened, seemingly in response to weaker
economic prospects and increased downside risks to the outlook
for U.S. and global growth. Contacts at communications,
technology, and transportation firms indicated that growth had
slowed in those sectors; surveys also indicated that growth in
the manufacturing sector had weakened during the summer. One
participant suggested that hurricanes and subsequent flooding
had contributed to the slowing in some parts of the country. In
contrast, business contacts reported that commodity-related
sectors such as energy, agriculture, and mining continued to
show strong gains; tourism also appeared to be doing well.
Exports remained a bright spot for U.S. manufacturers and
commodity producers. Business investment in equipment and
software had continued to expand in recent months, but some
contacts expressed concern that firms would cut capital spending
if their sales slowed further.

The housing sector remained depressed, with construction at very
low levels and seen as likely to remain so given the weakness in
new home sales and the continuing flow of foreclosed properties
into the market. Though mortgage rates were very low, spreads
between mortgage rates and yields on Treasury securities were
unusually wide. Moreover, still-tight credit standards meant
that many households were unable to qualify for loans to buy a
home, and the drop in house prices in recent years left others
unable to refinance an existing higher-rate mortgage.
Nonresidential construction generally remained weak, apart from
investment in extractive industries, and forward-looking
indicators of nonresidential construction had dropped.

Meeting participants generally noted that overall labor market
conditions had shown no improvement or had deteriorated in
recent months and the unemployment rate remained elevated. Even
after adjusting for the effects of strikes on reported payrolls,
the employment report for August showed weak job gains. Moreover,
both the average workweek and aggregate hours worked declined.
Contacts reported that slower growth, depressed business
confidence, and uncertainty about the economic outlook were
restraining hiring as well as capital investment; many also
cited uncertainty about regulatory and tax policies as
contributing to businesses’ reluctance to spend. Some business
contacts reported that their firms had made contingency plans to
reduce output and employment if demand for their products were
to turn down. Participants generally agreed that sluggish job
growth and the elevated unemployment rate reflected both weak
demand for goods and services and a mismatch between the
characteristics of the unemployed and the needs of the employers
that currently have jobs available, but they had varying views
about the relative importance of these two factors. Many
participants judged that weak demand was of most importance,
while a few argued that structural and geographic mismatches
were key. A few commented that business contacts reported
receiving large numbers of applications for relatively low-skilled positions but having difficulty finding and hiring
candidates for some highly skilled positions. Several
participants again noted that the exceptionally high level of
long-duration unemployment could lead to permanent negative
effects on the skills and employment prospects of those affected
and so reduce the economy’s longer-run productive potential.

Participants noted that financial markets were volatile over the
intermeeting period and that financial conditions were strained
at times, as investors reacted to the incoming economic data and
to news about European fiscal and financial developments.
Several participants argued that broader financial conditions
had become less accommodative over the intermeeting period: Risk
spreads had widened appreciably, likely reflecting a reduced
willingness of investors to bear risk, a weaker outlook for
growth in the United States and globally, and greater
uncertainty about economic prospects. On the positive side, some
participants noted that the reduction in leverage and increase
in financial firms’ liquidity cushions since the height of the
financial crisis likely had attenuated the adverse effects of
heightened risk aversion. Contacts in the banking sector
reported that U.S. banks remained willing to lend to qualified
customers, but that loan demand was weak. While noting that
conditions in bank funding markets had tightened, particularly
for European banks, participants observed that the capital and
liquidity positions of U.S. banks had strengthened in recent
quarters and that the credit quality of both business and
household loans had continued to improve. Nonetheless, some
large U.S. banks had seen further pressure on their stock prices
and CDS spreads. Participants agreed that, if European
policymakers did not respond effectively, European sovereign
debt and banking problems could intensify, with potentially
serious spillovers to the U.S. economy. However, it was noted
that the ECB was providing ample liquidity to European banks,
and that it had substantial capacity to provide additional
liquidity through its lending facilities if necessary.

Most participants agreed that inflation appeared to have
moderated in recent months compared with earlier in the year as
prices of energy and some commodities declined from their peaks,
though the moderation was not as substantial as many
participants had expected. Longer-term inflation expectations
had remained stable. Most participants anticipated that, with
stable inflation expectations, significant slack in labor and
product markets, slow wage growth, and little evidence of
pricing power among firms, inflation was likely to decline
moderately over time. Several suggested that slowing growth in
the United States and abroad made a new surge in commodity
prices unlikely. However, some noted that core as well as
headline had moved up, on balance, since last fall. A few
suggested that the juxtaposition of higher core inflation and
somewhat lower unemployment could mean that the degree of slack
in labor markets and the level of potential output were lower
than the Committee had thought. Some argued that the rise in
core inflation from very low levels reflected the accommodative
stance of monetary policy and indicated that the large-scale
asset purchases the Committee undertook from November through
June had been a successful response to the deflation risks of a
year ago. Many participants judged that the risks to the outlook
for inflation were roughly balanced. Some saw medium-run
inflation risks as tilted to the downside, in light of
persistent resource slack; some others argued that the
accommodative stance of monetary policy and the upward trend in
measures of core inflation this year suggested inflation risks
were tilted to the upside. Participants generally judged that
there was relatively little risk of deflation. One commented
that surveys showed that forecasters saw a low likelihood of
deflation; a second, however, noted that a measure of the
probability of deflation calculated from prices of Treasury
inflation-protected securities (TIPS) had declined as the
Federal Reserve conducted its second large-scale asset purchase
program but more recently had been rising.

Participants saw considerable uncertainty surrounding the
outlook for a gradual pickup in economic growth. It was again
noted that the cyclical impetus to economic expansion appeared
to be weaker than in past recoveries, but that the reasons for
the weakness were unclear, contributing to greater uncertainty
about the economic outlook. Several commented that, with
households and businesses seeking to reduce leverage rather than
to borrow and with housing markets in distress, some of the
normal mechanisms through which monetary policy actions are
transmitted to the real economy appeared to be attenuated. Many
participants saw significant downside risks to economic growth.
While they did not anticipate a downturn in economic activity,
several remarked that, with growth slow, the recovery was more
vulnerable to adverse shocks. Risks included the possibility of
more pronounced or more protracted deleveraging by households,
the chance of a larger-than-expected near-term fiscal tightening,
and potential spillovers to the United States if the financial
situation in Europe were to worsen appreciably. Participants
agreed to consider further how best to use their monetary policy
and liquidity tools to deal with such shocks if they were to
occur.

Committee Policy Action

In the discussion of monetary policy for the period ahead, most
members agreed that the revisions to the economic outlook
warranted some additional monetary policy accommodation to
support a stronger recovery and to help ensure that inflation,
over time, was at a level consistent with the Committee’s dual
mandate. While they recognized that monetary policy alone could
not completely address the economy’s ills, most members judged
that additional accommodation could contribute importantly to
better outcomes in terms of the Committee’s dual mandate of
maximum employment and price stability. Those viewing greater
policy accommodation as appropriate at this meeting generally
supported a maturity extension program that would combine asset
purchases and sales to extend the average maturity of securities
held in the SOMA without generating a substantial expansion of
the Federal Reserve’s balance sheet or reserve balances.
Specifically, those members supported a program under which the
Committee would announce its intention to purchase, by the end
of June 2012, $400 billion of Treasury securities with remaining
maturities of 6 years to 30 years and to sell an equal amount of
Treasury securities with remaining maturities of 3 years or less.
They expected this program to put downward pressure on longer-term interest rates and to help make broader financial
conditions more accommodative. While the scale of such a
maturity extension program was necessarily limited by the amount
of shorter-term securities in the SOMA portfolio, most members
judged the action as appropriate, given economic conditions and
the outlook. Two members said that current conditions and the
outlook could justify stronger policy action, but they supported
undertaking the maturity extension program at this meeting as it
did not rule out additional steps at future meetings. Three
members concluded that additional accommodation was not
appropriate at this time. The Committee discussed whether to
specify the parameters of the maturity extension program by
stating its intention to complete the full set of transactions
by June 2012 or by stating that it would undertake these
transactions at a specified monthly pace. Members saw benefits
to both approaches: The former would provide the public greater
clarity about the likely scale of the program and the latter
might allow the Committee greater flexibility to adjust the
scale of the program in response to unexpected economic
developments. A majority favored the first approach. Members
noted, however, that the Committee will continue to regularly
review the size and composition of its securities holdings and
that it is prepared to adjust those holdings as appropriate.

Most members also supported a change in the Committee’s
reinvestment policy. To help support conditions in mortgage
markets, the Committee decided to reinvest principal received
from its holdings of agency debt and agency MBS in agency MBS
rather than continuing to reinvest in longer-term Treasury
securities as had been the Committee’s practice for more than a
year. The effect of this change will be to keep the SOMA’s
holdings of agency securities at an approximately constant
level; under the previous practice, those holdings were
declining on an ongoing basis. This change in reinvestment
policy was expected to help reduce the spread between yields on
mortgage-backed securities and those on comparable-maturity
Treasury securities seen this year and so contribute to lower
mortgage rates. Members also noted that the change in
reinvestment policy could help prevent the shares of outstanding
longer-term Treasury securities held by the Federal Reserve from
reaching levels high enough to result in a deterioration in
Treasury market functioning. One member who opposed the maturity
extension program also opposed the change in reinvestment policy
because he judged that it would not benefit housing markets. At
the same time, the Committee decided to maintain its existing
policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the
federal funds rate at 0 to ¼ percent and to reaffirm its
anticipation that economic conditions-- including low rates of
resource utilization and a subdued outlook for inflation over
the medium run--are likely to warrant exceptionally low levels
for the federal funds rate at least through mid-2013. A couple
of members noted that they would prefer to change the
Committee’s forward guidance to provide greater clarity about
the economic conditions that would be likely to warrant
maintaining exceptionally low levels of the target federal funds
rate, but no decision was taken on this point.

The Committee agreed that it was important to acknowledge, in
the statement to be released following the meeting, that
economic growth remained slow and that indicators pointed to
continuing weakness in overall labor market conditions. It also
agreed to note that inflation appeared to have moderated since
earlier in the year as prices of energy and some commodities had
declined from their recent peaks, and that longer-term inflation
expectations remained stable. Members generally continued to
expect some pickup in the pace of the economic recovery over
coming quarters but anticipated that the unemployment rate would
decline only gradually and agreed that there were significant
downside risks to the economic outlook, including strains in
global financial markets. The Committee again anticipated that
inflation would settle, over coming quarters, at levels at or
below those consistent with the Committee’s mandate as the
effects of past energy and commodity price increases dissipate
further.

At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
it was instructed otherwise, to execute transactions in the
System Account in accordance with the following domestic policy
directive:

“The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote
sustainable growth in output. To further its long-run objectives,
the Committee seeks conditions in reserve markets consistent
with federal funds trading in a range from 0 to ¼ percent. The
Committee directs the Desk to purchase, by the end of June 2012,
Treasury securities with remaining maturities of approximately 6
years to 30 years with a total face value of $400 billion, and
to sell Treasury securities with remaining maturities of 3 years
or less with a total face value of $400 billion. The Committee
also directs the Desk to maintain its existing policy of rolling
over maturing Treasury securities into new issues and to
reinvest principal payments on all agency debt and agency
mortgage-backed securities in the System Open Market Account in
agency mortgage-backed securities in order to maintain the total
face value of domestic securities at approximately $2.6 trillion.
The Committee directs the Desk to engage in dollar roll
transactions as necessary to facilitate settlement of the
Federal Reserve’s agency MBS transactions. The System Open
Market Account Manager and the Secretary will keep the Committee
informed of ongoing developments regarding the System’s balance
sheet that could affect the attainment over time of the
Committee’s objectives of maximum employment and price
stability.”

The vote encompassed approval of the statement below to be
released at 2:15 p.m.:

“Information received since the Federal Open Market Committee
met in August indicates that economic growth remains slow.
Recent indicators point to continuing weakness in overall labor
market conditions, and the unemployment rate remains elevated.
Household spending has been increasing at only a modest pace in
recent months despite some recovery in sales of motor vehicles
as supply-chain disruptions eased. Investment in nonresidential
structures is still weak, and the housing sector remains
depressed. However, business investment in equipment and
software continues to expand. Inflation appears to have
moderated since earlier in the year as prices of energy and some
commodities have declined from their peaks. Longer-term
inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to
foster maximum employment and price stability. The Committee
continues to expect some pickup in the pace of recovery over
coming quarters but anticipates that the unemployment rate will
decline only gradually toward levels that the Committee judges
to be consistent with its dual mandate. Moreover, there are
significant downside risks to the economic outlook, including
strains in global financial markets. The Committee also
anticipates that inflation will settle, over coming quarters, at
levels at or below those consistent with the Committee’s dual
mandate as the effects of past energy and other commodity price
increases dissipate further. However, the Committee will
continue to pay close attention to the evolution of inflation
and inflation expectations.

To support a stronger economic recovery and to help ensure that
inflation, over time, is at levels consistent with the dual
mandate, the Committee decided today to extend the average
maturity of its holdings of securities. The Committee intends to
purchase, by the end of June 2012, $400 billion of Treasury
securities with remaining maturities of 6 years to 30 years and
to sell an equal amount of Treasury securities with remaining
maturities of 3 years or less. This program should put downward
pressure on longer-term interest rates and help make broader
financial conditions more accommodative. The Committee will
regularly review the size and composition of its securities
holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee
will now reinvest principal payments from its holdings of agency
debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its
existing policy of rolling over maturing Treasury securities at
auction.

The Committee also decided to keep the target range for the
federal funds rate at 0 to ¼ percent and currently anticipates
that economic conditions--including low rates of resource
utilization and a subdued outlook for inflation over the medium
run--are likely to warrant exceptionally low levels for the
federal funds rate at least through mid-2013.

The Committee discussed the range of policy tools available to
promote a stronger economic recovery in a context of price
stability. It will continue to assess the economic outlook in
light of incoming information and is prepared to employ its
tools as appropriate.”

Messrs. Fisher, Kocherlakota, and Plosser dissented because they
did not support additional policy accommodation at this time. Mr.
Fisher saw a maturity extension program as providing few, if any,
benefits in support of job creation or economic growth, while it
could potentially constrain or complicate the timely removal of
policy accommodation. In his view, any reduction in long-term
Treasury rates resulting from this policy action would likely
lead to further hoarding by savers, with counterproductive
results on business and consumer confidence and spending
behaviors. He felt that policymakers should instead focus their
attention on improving the monetary policy transmission
mechanism, particularly with regard to the activity of community
banks, which are vital to small business lending and job
creation. Mr. Kocherlakota’s perspective on the policy decision
was again shaped by his view that in November 2010, the
Committee had chosen a level of accommodation that was well
calibrated for the condition of the economy. Since November,
inflation, and the one-year-ahead forecast for inflation, had
risen, while unemployment, and the one-year-ahead forecast for
unemployment, had fallen. He did not believe that providing more
monetary accommodation was the appropriate response to those
changes in the economy, given the current policy framework. Mr.
Plosser felt that a maturity extension program would do little
to improve near-term growth or employment, in light of the
ongoing structural adjustments and fiscal challenges both in the
United States and abroad. Moreover, in his view, with inflation
continuing to run above earlier forecasts, such a program could
risk adding unwanted inflationary pressures and complicate the
eventual exit from the period of extraordinarily accommodative
monetary policy.

Following the policy vote, the Manager of the System Open Market
Account summarized how the Desk would implement the Committee’s
decisions. To implement the maturity extension program, the Desk
would distribute purchases about evenly across nominal Treasury
securities with 6 to 8 years to maturity, with 8 to 10 years to
maturity, and with 10 to 30 years to maturity; the Desk would
also buy a small amount of TIPS with remaining maturities of 6
to 30 years. This distribution would allocate a much larger
share of purchases to longer maturities than was the case in the
Committee’s previous asset purchase programs. At the same time,
the Desk would sell, from the SOMA portfolio, Treasury
securities with remaining maturities of 3 months to 3 years. All
Treasury purchases and sales would be conducted using
competitive auctions. With respect to the MBS reinvestment
program, the Desk would concentrate purchases in newly issued
agency-backed MBS and would conduct purchases through a
competitive bidding process.

It was agreed that the next meeting of the Committee would be
held on Tuesday-Wednesday, November 1-2, 2011. The meeting
adjourned at 12:30 p.m. on September 21, 2011.

Secretary’s Note: The following information regarding the June
21-22, 2011 FOMC meeting was inadvertently omitted from previous
minutes. By unanimous vote at that meeting, the Committee
ratified the Desk’s domestic transactions since the April 26-27,
2011 meeting, and by notation vote completed on July 11, 2011,
the Committee unanimously approved the minutes of the June 21-22
FOMC meeting.